2017 (1) TMI 1735 - AT - Income Tax

Violation of prescribed method u/s. 145A in respect of the valuation of stock - upward adjustment made by the CIT-A invoking the provisions of section 43B - A.O. noticed that the assessee has included Excise Duty of ₹ 15,97,851/- to the value of closing stock in view of the provisions of section 145A of the act instead of balance of Excise Duty of ₹ 21,76,920/- available as on 31.03.2009 - HELD THAT - CIT(A) has travelled beyond the grievance before him and invoked the provisions of section 43B of the Act and directed the A.O. to consider the disallowance . In our considered opinion, this amounts to enhancement. We also find that this act of the First Appellate Authority is without notice and in contravention to the provisions of section 251(2) of the Act. In our considered view, any enhancement without notice and made in contravention to the provisions of section 251(2) of the Act violates the mandatory provisions of the act and cannot be upheld. We, therefore, set aside the findings of the ld. CIT(A) to this extent, the addition stands deleted and the observations of the ld. CIT(A) qua the enhancement is struck down. Disallowance of insurance expenses on account of short adjustment of prepaid insurance expenses - HELD THAT - It is true that the assessee has incurred insurance premium of ₹ 39,416/- during the year under consideration. It is also true that the entire insurance premium does not pertain to the year under consideration but amount of ₹ 13,533/- is attributable to the next financial year. It would not be out of place to refer to the observations made by the Hon ble High Court of Bombay in the case of Nagri Mills Co Ltd. 1957 (9) TMI 30 - BOMBAY HIGH COURT - Since the tax effect would be neutral, we do not find any merit in the impugned disallowance in the light of the afore-stated observations of the Hon ble High Court of Bombay. We set aside the findings of the ld. CIT(A) and direct the A.O. to delete the addition. Addition u/s 69C - Estimating expenditure on installation of certain assets @ 7% of the value of asset - AO noticed that the assessee has not debited any expense relating to the installation and/or labour charges and that such plant and machineries cannot be installed without incurring any expenditure, hence estimated 10% of the total additions and made an addition u/s. 69C - HELD THAT - The burden is on the revenue to prove that the assessee has actually incurred some expenditure which is not explained. We find that the revenue authorities have not brought any evidence on record to show that the assessee actually incurred some expenditure in the installation of the Plant and Machineries. We also find that the revenue authorities did not make any enquiry from the suppliers of the plant and machineries when complete bills /invoices were before them. In our considered opinion, the entire addition has been made on presumption and, therefore such addition cannot be sustained.

Summary

Issues involved:
1. Valuation of stock and application of section 43B of the Act.
2. Disallowance of insurance expenses.
3. Estimation of expenditure on installation of assets under section 69C of the Act.

Analysis:

Issue 1: Valuation of stock and application of section 43B of the Act:
The Assessing Officer (A.O.) noticed discrepancies in the valuation of stock by the assessee and made adjustments. The A.O. invoked section 145A of the Act and added an amount to the value of stock. The assessee appealed, explaining its accounting method, which was accepted by the Commissioner of Income Tax (CIT-A). However, the CIT(A) directed the A.O. to disallow a sum under section 43B of the Act, which was not originally raised as an issue. The tribunal held that such enhancement without notice and in violation of statutory provisions cannot be upheld. The tribunal set aside the CIT(A)'s direction under section 43B, deleting the earlier addition made by the A.O.

Issue 2: Disallowance of insurance expenses:
The A.O. disallowed a portion of insurance expenses claimed by the assessee, citing a mismatch between the premium paid and the portion related to the financial year under consideration. The CIT(A) upheld the disallowance, but the tribunal disagreed. Citing a precedent from the Hon'ble Gujarat High Court, the tribunal emphasized that since the tax effect would be neutral, there was no merit in disallowing the expenses. The tribunal directed the A.O. to delete the disallowed amount of insurance expenses.

Issue 3: Estimation of expenditure on installation of assets under section 69C of the Act:
The A.O. estimated expenditure on the installation of assets and made an addition under section 69C of the Act. The CIT(A) partially confirmed the addition, but the tribunal ruled in favor of the assessee. The tribunal noted that the burden of proof lies with the revenue to show unexplained expenditure, which was not done in this case. The tribunal found the addition made by the A.O. to be based on presumption and lacking in evidence. Consequently, the tribunal directed the A.O. to delete the addition made under section 69C of the Act.

In conclusion, the tribunal allowed the appeal filed by the assessee, setting aside various additions and disallowances made by the revenue authorities. The tribunal's decision was based on the lack of evidence and procedural irregularities in the assessments.